The disconnect between political rhetoric and fact, or political rhetoric and outcome, has never been greater.

Still, we’re seeing assets that react to the rhetoric as opposed to the fact. As an example, we’re seeing a currency, such as the Mexican Peso, react very heavily to whether the probability of Trump being elected goes up and down. We believe there is an opportunity to take advantage of that volatility because it is not fact-based, irrespective of who the candidate would be. And as a result, we do see opportunities in areas like Emerging Markets to take advantage when they decline in response to change in sentiment.

US Election

US Election

Following the election results it’s still going to be quite unclear which of the policies currently espoused are actually going to become laws. However, we have some idea of the direction.

To the extent Trump becomes elected, we’re going to see significant increase in protectionism, we will see significant pickup in infrastructure spending, we will see taxes that are effectively flat or down slightly. And as a result we will see sectors of the economy out-perform and we will actually see significant rise in inflation to the extent protectionism takes hold.

In case Hillary gets elected, it also has implications for health care, has implications for high-end spending as a result of higher taxes. But the globalization trends that we’ve seen to date are probably going to persist, and the impact on inflation is going to be much lower.

As we move beyond the current election, we will continue to see the government policy have a profound impact on the outcome of inflation in ways that are not trivial. For example, Trump’s election, which leads to protectionism, may actually drive inflation which would actually be bad for many of the safety assets such as bonds. Flipside, the election of Hillary may actually be good for some of the safety assets.

And as a result, we believe its not so much that one candidate or the other is going to be better or worse for the capital markets, but the mix of the investments may change depending on which policies are proposed, and perhaps more importantly, which ones stand a chance of being implemented.

Article by Vadim Zlotnikov